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In the first quarter (Q1) of 2024, the broad-market S&P 500 was up 10.56% in the Year Till Date (YTD). However, this cannot be construed as a sign that the entirety of the market has recovered. Given the variety of conflict and economic flashpoints around the world, various financial institutions contend that the outlook for Q2 2024 is quite nuanced.
Central to this nuance is the mistaken notion that rising tides raises all boats equally. The earnings sentiment of large companies – such as the constituents of the S&P 500 – substantially outpaces those of smaller companies such as the constituents of the Russell 20001. From the start of 2023 till the end of Q1 2024, the average Earnings Per Share of the S&P 500 has been stable while that of the Russell 2000 has been plunging.
One factor that helped float the inherent prospect within larger companies versus smaller companies has been the rates regime since the pandemic. A sharp rise in overnight interest rates allowed large companies to earn interest from their cash/working capital while the low rate environment that manifested in the immediate post-COVID period enabled large companies with strong credit ratings to refinance at lower rates. In contrast, smaller companies tend to not be rated for credit. Instead, they are more exposed to bank loans wherein the real cost of borrowing tend to be passed onto.
Rates staying high for longer imply that financing via loans are affected across the board. This has a direct impact on home buying. Among the various U.S. asset classes, the real estate sector shows the highest drawback from fair value estimations2.
When considered along factor styles and stock capitalization, the importance of size becomes even more prevalent. Overall, value factor stocks are lagging behind fair valuations while growth stocks are running ahead. However, this “overall” perception is heavily nuanced by size.
Among growth stocks, large- and mid-cap stocks are driving virtually the entirety of this valuation. Conversely, small-cap stocks show a very pronounced lag behind fair value estimations among value stocks. Large-cap stocks are the highest-priced across all factor styles while small-cap stocks are the most beleaguered.
As of February 2024, the US equity market had hit valuation levels not seen since the dot-com and 2021 technology bubbles3. This is best represented by estimating the Z-score of US equities, wherein the equities’ variability in returns is measured against their mean values. Since 2023, this measure has been seen to be steadily climbing.
Historically, the current equity valuation has led to low equity returns after subtracting inflation over the subsequent 10 years. Adding to the downward pressure is the fact that rates will stay “higher for longer”: as of Friday, the yield on the 10-Year Treasury had moved up to 4.62% as of Friday’s close with some institutions expecting the rates to go over 5% in the course of the year.
Views on Q2Overall, institutions show a significant amount of convergence on views. Prominent points of consensus was exemplified by Saxo Bank’s commentary in March this year wherein U.S. equities have broadly slipped into a neutral outlook while China’s preponderance in Emerging Markets creates a negative outlook for stocks in this category.
European equities, on the other hand, appear positive in many outlook summaries. This is largely on account of three factors:
Through most of the Eurozone as well as the United Kingdom, overall disinflationary trends are manifesting with some strength after factoring out higher costs due to energy consumption. In fact, energy stocks are overall poised to be relatively strong performers, given that OPEC+ have been largely neutral on increasing production until at least July4.
Given the aforementioned disinflationary trends, most members of the European Central Bank signalled last week that they’re willing to perform at least one rate cut in June5. This would serve to provide some degree of amelioration to the loans and mortgages markets while also incentivizing capital flows back into equities.
The ongoing conflict flashpoints in both Ukraine as well as in the Middle East have been propelling European governments to increase focus on bolstering defence spending, with particular focus on indigenous efforts.
However, it remains a fact that, as with the U.S. equity markets, market breadth is under significant stress. In addition to defence stocks, the most significant sectors of interest are pharmaceuticals and tech – notably those with significant AI footprint.
However, while AI is likely to remain a central theme for some time to come, there are largely unresolved questions on exactly how high can AI-relevant stocks be valued at given an upper ceiling on the maximum extent of cost benefits to the users of said technology. This past Friday in particular highlights the market’s nervousness over AI’s overvaluation: after Super Micro Computer (SMCI) declined to publish preliminary Q1 results, the stock dropped 23% in a single day. Panic rapidly spread to other stocks of more seasoned high-performers: NVIDIA (NVDA) fell 10% on the same day, Advanced Micro Devices, Inc. (AMD) dropped by 5% while Arm Holdings plc (ARM) lost nearly 17%.
Along with top-line European equities, the energy and financial sector also hold significant bullish potential. However, overvaluation concerns will likely make resistance a recurring feature. All in all, Q2 is likely to be a rocky ride. Professional investors will likely find a vast number of tactical opportunities in the markets over the current quarter. Leverage Shares has a number of promising products in either direction that seasoned players across Europe are bound to find interesting: click here to browse the products currently on offer.
Footnotes:
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Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
